The US dollar was firmer in European morning trade on Friday as Federal Reserve officials once again lined up to warn of the dangers of rising inflation.
US core consumer inflation has risen to a two-and-a-half-year high of 2.4 per cent, prompting some speculation that the pace of US monetary tightening may be stepped up, lending greater yield support to the dollar.
They are referring to the CPI ex food and energy, not the corresponding PCE statistic that some prefer, but that doesn't really change the essential fact.
William Poole, the president of the St Louis Fed, set the ball rolling when he said: “I think the biggest unknown is whether the inflation pressures, which are pretty obvious, are a temporary thing, perhaps because of pass-through and that sort of thing, or whether we have a bigger inflation risk ahead of us.”
Anthony Santomero, president of the Philadelphia Fed, added: “I think we have to recognise we’re in the fourth year of a recovery and we have to remain vigilant on the inflation front. The data we’re getting is consistent with inflation being reasonably well contained but we’re also hearing anecdotes suggesting increased price pressure”...
The comments mirrored that of the previous weekend when Mr Poole and Michael Moskow, the president of the Chicago Fed, both warned about inflation risks, helping send the dollar higher.
At the ECB, in contrast:
Thoughts of widening interest rate differentials between the US and eurozone were further buttressed by the failure of Jean-Claude Trichet, the president of the European Central Bank, to take the more hawkish stance expected by some observers at Thursday’s ECB press conference.
At FXStreet.com, "less hawkish" is replaced by "relatively dovish."
European government bonds firmed as the prospect of an imminent interest rate hike from the European Central Bank diminished further in the wake of relatively dovish comments from the ECB's president.
Jean-Claude Trichet told a press conference after the ECB kept its key refi rate unchanged at 2.00 pct that the central bank's governing council did not discuss a hike or a cut, in contrast to last month when he only mentioned that a rate cut had not been discussed.
He also said recent data and economic surveys had been mixed, adding that "in general they point to ongoing economic growth at a moderate pace over the short-term, with no clear signs as yet of a strengthening in underlying activity."
A few months ago, he said the recovery was "gathering momentum."
"The upshot is that we do not expect the ECB to raise rates at all in 2005, despite its desire to see rates at more 'normal' levels eventually," said Julien Seetharamdoo, international economist at Capital Economics.
Maybe the World Bank is getting its preferred mix of monetary policy after all.